WILMINGTON, Del. (AP) -- A bankruptcy judge on Friday granted KB Toys' requests to use its existing cash management system and continue paying its workers as it prepares for going-out-of-business sales.

The nation's largest mall-based toy retailer filed for Chapter 11 bankruptcy protection on Thursday and announced it will begin liquidation sales.

Judge Kevin Carey granted all of the Pittsfield, Mass.-based company's first-day motions, including a request to use cash collateral on liens to pay operating expenses. But he said he wants more details on the company's bankruptcy plan.

"I'm being asked to approve something, the alternative to which approval doesn't look good," said the judge, noting that the formation of a creditors committee next week will be a critical step in the company's liquidation plans and he expects store landlords to weigh in.

He set a second hearing Dec. 18.

Carey also asked why the retailer waited until just two weeks before Christmas to seek bankruptcy protection.

Joel Waite, an attorney for KB Toys, said the company tried to find a way to plug a looming liquidity problem, but that the broad decline in consumer spending had a "devastating" effect on the company. Waite noted that between Oct. 5 and Dec. 8, same-store sales fell nearly 20 percent.

"For a toy retailer to have that kind of decline at this time of year ... says a lot about what's going on," he said.

Facing loan renegotiations expected to result in more restrictive terms, the company decided that starting to liquidate its retail operations during the holiday shopping season was the best way to maximize its assets for creditors, Waite added.

Filing for Chapter 11 protection rather than Chapter 7 liquidation allows a company to retain more control as it sells off assets.

"The best way to maintain the pot of money that is there ... is to move forward with this process," Waite said.

Heading the list of the company's unsecured creditors is Hong Kong-based toy manufacturer Li & Fung, which is owed about $27.2 million. Second is El Segundo, Calif.-based Mattel Toys, with claims totaling $1.3 million, followed by St. Louis-based Energizer Battery, which is owed more than $728,000.

KB Toys, which emerged from an initial bankruptcy filing in 2005 as a subsidiary of investment firm Prentice Capital Management, has about $480 million in annual sales and roughly 10,800 employees, more than half of whom are temporary seasonal workers. It operates 277 mall-based stores, 114 outlet stores, 40 KB Toy Works stores, mainly in strip malls, and 30 temporary holiday stores.

Carey authorized, but did not order, the company to continue honoring gift cards, which it stopped selling Dec. 8. The total unredeemed value of the cards is about $12 million, but roughly half that amount has been outstanding for more than two years. It sold only about $2 million worth of gift cards this year.

Waite said the company anticipates it will honor the cards. He said customers who are redeeming the cards often spend more than the amount covered by cards.